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Investment views

South Africa needs a stable National Treasury

31 March 2017

By Nazmeera Moola, Co-Head of SA & Africa Fixed Income and Khaya Gobodo: Strategy Leader: Quality, Investec Asset Management

While analysts and investors are hyperventilating about the impact of the removal of Pravin Gordhan as Finance Minister, it is sometimes difficult for the general public to understand the impact of a sharp change in the direction of fiscal policy on each and every person in the country.  

It may be easy for some in politics to dismiss the opinions of credit rating agencies or foreign and local investors.  However, irresponsible fiscal policy can quickly lead to less money for social welfare grants and higher prices for the most basic goods and services.  

South Africa’s history offers an excellent lesson in the dangers of unsustainable policy. The catalyst for the end of Apartheid was not an attack of conscience by the National Party – rather it was the pragmatic realisation that they were running out of options.

After a decade of sluggish growth, the South African state was on the verge of bankruptcy in 1994 – exacerbated by the large budget deficits the apartheid government incurred in its final years.  Between 1994 and 2000, the National Treasury, together with the leadership of the ANC, stabilised the fiscus.  A transparent budgeting process that made South Africa a worldwide leader in macroeconomic management was adopted.  The state built credible macroeconomic frameworks and strengthened the institutions responsible for overseeing the economy. 

These efforts resulted in repeated credit rating upgrades between 1996 and 2005, leading to lower borrowing costs for the state, companies and individuals. This freed up money for the state to deliver access to basic services like electricity, water and sanitation for most South Africans and social support, without which too many South Africans would live in abject poverty. There is little doubt that macroeconomic stability created the base from which to reap the economic gains seen between 2000 and 2008.  Many of those gains have since been lost.  

In 1994, 25% of South African government revenues was spent on servicing debt – one out of every four rands the government collected in taxes was spent on interest costs! That number bottomed at 6% in 2008.  It is now around 10%.

The South African government spent R1.45 trillion in the current financial year ended 31 March 2017.  That sounds like a lot of money.  However, the bulk of that was spent on basic education (R226bn), healthcare (R170bn) and social welfare grants (R165bn).  
A loss of investor confidence in the SA government due to the erosion of National Treasury would push up borrowing costs.  A sharp rise in borrowing costs would increase the amount spent on interest higher still. More money spent servicing debt would leave less for basic services including healthcare, education and housing.  

Service delivery protests will accelerate when budgets for basic services like sanitation, clinics and security are cut.  This is what happened in Brazil in the late 1980s – when interest costs consumed all the taxes raised for a few years.  This is what happened in Greece –  eventually the government was forced to fire teachers and nurses to service debt costs.  

Foreign investors own 38% of South African bonds.  A loss of confidence that leads to their exit would result in both a sell-off in bonds resulting in higher interest rates and a much weaker rand.  Without a strong National Treasury, the rand could be north of 20ZAR/US$ in the not-too-distant future. South Africa imports about half of what it consumes, which means currency weakness translates directly into higher prices, especially in food and fuel prices. These two items account for a far bigger portion of the purchase basket of poor people than of the better off, and increases here would lead to more challenges for the poor.  The erosion of the National Treasury would eventually lead to higher food prices.  

It is worth emphasising here that we are not claiming that Pravin Gordhan is the only person fit to be South Africa’s Finance Minister. Rather, it is vital that policy is run in a manner that gives confidence to the people that lend the South African government money and by a person that is well trusted. Given the delicate juncture that South Africa finds itself at, the changes made at the Finance Ministry are unnecessary.  The poorest in our society will be worst hit by such a move.  

Instead of playing a local version of Game of Thrones, South Africa needs leadership that focuses on the reforms necessary to boost growth well beyond the current tepid level of 1% per year.  We need the Department of Minerals to propagate mining policy that encourages investment while protecting workers.  We need the Department of Social Welfare to ensure the distribution of social welfare grants in a cheap and transparent manner.  We need the Department of Basic Education to distribute text books on time.  We need the rest of government to do its job – and do everything required to retain the institutional strength of the National Treasury.    

Investec Asset Management is responsible for the investment management of R1.6 trillion of client assets globally.  

Nazmeera Moola oversees the investment management of R190bn of client assets as Co-Head of SA & Africa Fixed Income at Investec Asset Management.  

Khaya Gobodo oversees the investment management of R77bn of client assets as Strategy Leader of the Quality capability at Investec Asset Management. 

About Investec Asset Management

Investec Asset Management is an independently managed subsidiary of Investec Group.Investec Asset Management is a specialist investment manager, providing a premier range of products to institutional and individual investors. Established in 1991, the firm has been built from start-up into an international business managing approximately R1.6 trillion* on behalf of third party clients. The firm seeks to create a profitable partnership between clients, shareholders and employees, and to exceed expectations for both client service and performance.

*As at end December 2016

Investec Asset Management

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